LinkedIn Earnings - Q2 2014 Review

LinkedIn is a great company but a risky investment at its current valuations.

Just days after Twitter (NYSE:TWTR) thrashed earnings with its quarterly results, LinkedIn (NYSE:LNKD) has come out with strong numbers in its latest earnings release. The professional networking site announced its Q3 2014 results on 31 July 2014 to register a solid revenue and EPS beat. That apart, the company displayed improvements across the board and hiked its full year revenue guidance to complete a strong all round performance. LinkedIn’s stock price was up about 6% in pre-market trading. LinkedIn is a great company, but its valuations are currently steep, making it a risky bet.

LinkedIn Estimates vs Actuals

LinkedIn Q2 2014

Estimates

Actuals

Beat %

Revenue - $ million

511

534

5%

EPS - $

0.39

0.51

31%

LinkedIn has now beaten both revenue and EPS estimates for 10 consecutive quarters. The company also by default thrashed its own guidance, since it was lower than analyst estimates.

LinkedIn Revenue Growth

LinkedIn’s revenue for Q2 2014 was $534 million. The company registered a Year on Year (YoY) revenue growth of 47% for Q2. The numbers translated to LinkedIn’s highest QoQ absolute revenue addition so far, adding $61 million over its revenue for Q1 this year.

LinkedIn Revenue Break Up

LinkedIn saw strong growth across revenue segments. Talent Solutions grew the fastest among verticals and continued to account for bulk of the revenue (60%).

Talent Solutions – Grew 49% YoY, 11% sequentially

Marketing Solutions – Grew 44% YoY, 24% sequentially

Premium Subscriptions – Grew 44% YoY, 10% sequentially

In Q2, LinkedIn launched “Spotlight” a slightly scaled down, cheaper premium subscription option. The impact of the same, if any, will probably show up in Q3, since it was launched towards the end of the quarter. For Q2, there is no quantifiable jump in the share of revenue from ‘Premium Subscriptions’ (20%).

LinkedIn Profitability

Profitability continued to be in a familiar but low range for LinkedIn in Q2. LinkedIn registered an operating profit of $14.1 million and a net loss of $-0.93 million translating to margins of 2.6% and -0.02%. LinkedIn’s operating profits and margins were higher than those in its previous 4 quarters. Higher provisions for tax sent net income into negative territory.

LinkedIn Member Growth & Engagement Metrics

LinkedIn’s member base expanded to 313.4 million members. The company began reporting 3 new internal metrics starting this quarter, to replace the ‘unique visitors’ and ‘page views’ numbers it used to source from ComScore.

LinkedIn Revenue & EPS Guidance

LinkedIn’s revenue guidance for Q3 2014 comes across as conservative. Though the projected YoY growth rates are the highest in about 4 quarters (counting Q3 2014), in absolute terms, it translates to an addition of $9-13 million, its lowest in over 3 years. However, as we mentioned earlier, LinkedIn’s guidance has been conservative in the past. So, we wouldn’t want to read too much into it.

Lower End

Higher End

Projected YoY Growth

Q3 2014

Revenue $ million

543

547

49-50%

Non GAAP EPS - $

0.44

0.44

13%

FY 2014

Revenue $ million

2140

2150

40%

Non GAAP EPS - $

1.8

1.8

12%

The highlight is that LinkedIn has revised its full year guidance upwards by about 3.5-4%. Here again, the YoY growth rate is a fair bit lower than its recent growth rates. Another revision won’t be surprising if it comes at the end of Q3.

LinkedIn Valuation and Outlook

LinkedIn currently trades at a stock price of $181 a share. Pre-market trading suggests that it might open about 9% higher at $197 a share. The two prices translate to a Price to Sales ratio of 12 – 13. LinkedIn’s valuations are steep and make it a risky investment option.

Going by the company’s guidance, revenue growth seems to be accelerating, though marginally. LinkedIn has a great audience, a fact that is reflected in its monetization rate. Going by Quantcast data, LinkedIn averaged 143 million active users this quarter (average of monthly numbers for Q2) representing a revenue/active user of $3.7. Going by LinkedIn’s own new ‘Monthly Unique Visitor Member’ metric, its revenue/active user stands at a much higher $6.3. LinkedIn’s acquisition of Bizo which enables measurable advertising for professional audiences might just further drive monetization rates.

Additionally, we see the unbundling of LinkedIn’s services into separate mobile apps as a positive. LinkedIn has a lot going for it, but valuations are not one of those factors. The way we see it, LinkedIn is a great company at an unattractive, steep price. Our LinkedIn Stock Analysis highlights some key numbers and facts that you should look at while you’re evaluating LinkedIn.

LinkedIn Stock Articles & Video

Earnings and revenues show good momentum, but the future outlook may be overly bullish. Facebook is trading at a significant premium to comparable companies, and while profitable, may be a "growth trap. "Instagram is a great add-on to revenues

Talent Solutions revenue may be affected yet again from a weakening global job environment. LinkedIn has some pretty stiff competition in its sponsored updates and advertising categories. User ad revenue growth will be the primary metrics that the street will go by for the LinkedIn's Q2 earnings.

LinkedIn will undoubtedly take advantage of potential much higher engagement levels on the platform which will lead to stronger advertising revenue. Premium subscriptions will grow due to more value being added to the user. MAU users continue to grow steadily. Furthermore top talent will stay which will drive the company forward.

Microsoft's acquisition of Linkedln will help improve Linkedln's credit outlook and subsequently valuations. Microsoft will be forced to make Linkedln more cost efficient. Therefore, allowing Linkedln to be independent might not be effective. Also, would a partnership have made more sense than an acquisition?

Microsoft is buying LinkedIn for $26.2 billion, a $48/share premium on LinkedIn's previous close. LinkedIn needed capital to face Facebook, and Microsoft needed a social play. The deal still values LinkedIn below what it was priced at a year ago.

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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